December 8, 2000

WaMu poised to expand market share

Each week, the Daily Journal of Commerce compiles analysts recommendations on local and national stocks.

Stock prices reflect Thursday's close. The Dow lost 47 points to close at 10,617, and the Nasdaq dropped 44 points to 2,753. The S&P 500 lost 8 points to close at 1,344.

Analysts use the following guidelines for their recommendations:

• Strong buy, buy or highest
  
• Buy/accumulate, mild buy, outperform, attractive or above average
  
• Neutral, hold, reasonably priced, average or market performer
  
• Mild sell, unattractive, below average or underperform
  
• Sell, lowest

52-week high: $50.37
52-week low: $21.62

Buy. While bank stocks have slowed their gains in recent months due to fears about credit quality, Erick Reim of U.S. Bancorp Piper Jaffray said that trend is isolated among the largest banks such as Bank of America and Bank of New York.

The well-publicized credit troubles hitting companies such as Sunbeam and Owens Corning have hurt larger banking institutions, but not smaller institutions such as Washington Mutual, which focuses on financial services to families and small- to mid-sized businesses. "Concerns at the community bank level have remained rather muted," he said.

Still, as the economy cools bank stocks will not be immune to the slowdown. "While we do expect a gradual downward trend in credit quality to accompany the slowing economy, we maintain that further credit losses will be more of a reversion to the mean rather than the beginning of a meltdown," said Reim.

On a positive note, Reim sees expanding net interest margin for WaMu for the current fourth quarter as well as future benefits coming from the recent acquisition of PNC Financial Services Group. PNC is expected to solidify its mortgage origination and loan servicing position nationally. "We believe it will be increasingly important for survivors in the mortgage business to compete on a very large scale," he said.

In addition, WaMu continues to expand its franchise and market share in both households and checking accounts, increasing by 141,000 net new accounts in the third quarter -- a key to its success, Reim said. That, combined with new technology to streamline the mortgage origination process and leveraging recent acquisitions, will bode well for the company.

"We believe Washington Mutual is very well positioned, given its significant scale, to capitalize on efficiencies and significantly enhance its profitability," he said.

52-week high: $60.50
52-week low: $25.93

Buy. Costco's November comparable store sales missed estimates at Dain Rauscher. Sales increased 3 percent rather than Rauscher's expectation of 7 percent.

"Costco's comps are demonstrating a generalized slowing across most product segments, which we believe is due to a slowdown in the general economy and reduced consumer spending," said analyst Bob Toomey. Also slowing spending, Toomey said, is low inventory on key electronic games like Playstation 2 and a weaker Canadian dollar and British pound -- both what he considers "aberrational" factors.

Still, Costco's operations remain sound, he said. Also, the Issaquah company continues to progress with 36 planned new store openings this year, up from 22 last year. Performance of new store openings is running at or above expectations.

But, with slower consumer spending nationally Costco will not be immune this Christmas. "We are anticipating a more difficult second quarter and Christmas for Costco, as with many retailers, due to year-over-year contrast in Y2K comparisons and slowing consumer spending growth rates," said Toomey. "We reduced our same-store sales and revenue estimates slightly to account for what we expect could be a more difficult quarter."

He maintained Q1 EPS estimate of 29 cents, but reduced Q2 estimate from 42 to 39 cents and full year estimate from $1.50 to $1.46. "We remain confident in the strength of the Costco business model and believe the company can achieve longer term EPS growth -- 14 to 15 percent in FY02 -- as new store opening costs and related expense growth slows to a smaller proportion of sales."

52-week high: $138.50
52-week low: $10.25

Accumulate. While InfoSpace has been taken down near its 52-week low, Allyson Rodgers of Ragen MacKenzie said third quarter results showed promise.

"Wireless services revenue grew more than 100 percent sequentially and made up about 10 percent of quarterly revenue, reflecting strong wireless Internet subscriber growth," she said. "Going forward, InfoSpace is poised with strong growth potential across all business segments as the company takes advantage of significant cross-sell opportunities among network members provided by the recent merger."

Rodgers estimated that InfoSpace trades at an approximately 25 percent discount to its peer group. She set a 12-month price target of $55.

52-week high: $127.50
52-week low: $29.25

Strong buy. Steve Weinstein of Pacific Crest said eBay's attractive market share, impressive fundamental strength and valuation make it a compelling buy at current prices. Listings on eBay, as of Dec. 1, increased by 269,000 to 5.8 million -- up 4.8 percent from the previous week. For the fourth quarter, the sequential growth in listings is 16.4 percent over the previous quarter, in the Pacific Crest model.

"eBay recently started allowing sellers to list an item in more than one category for an additional fee," Weinstein notes. "This creates a new revenue opportunity." As of Nov. 24, eBay had 94 percent market share for Internet trading activity, compared with Yahoo's 6 percent.

"Trading at a P/E ratio of only 1.4 times its long-term growth rate, eBay is inexpensive for leading new economy businesses," he said. "In our view, eBay's position as the fastest growing, most profitable and most dominant company in e-commerce warrants a premium valuation."

52-week high: $77.25
52-week low: $2.50

Strong buy. US Bancorp Piper Jaffray estimates that Cell Therapeutics' recently approved drug, Trisenox, will generate $7 million in sales for 2001, $42 million in 02 and $82 million in 03. The drug treats acute promyelocytic leukemia (APL).

Analyst Peter Ginsberg said presentations on the drug this week "furthered the growing database of results showing that Trisenox is highly effective and well tolerated in relapsed APL patients." Trisenox demonstrated an 87 percent complete response rate in relapsed APL patients.

"The data in the presentation that were new to us were that 18-month overall survival now stands at 66 percent and 18-month relapse-free survival now stands at 50 percent," he said. "Since these relapsed APL patients would typically be expected to only live for several months, we believe that Trisenox is clearly benefitting these patients."

The use of Trisenox in newly diagnosed APL patients is also being explored in trials. "Use in early-stage APL and other hematologic cancers should drive significant Trisenox sales increases in 2002 and beyond," he said.

52-week high: $113
52-week low: $19.37

Buy. While Amazon's stock has nearly sunk to mid-98 levels of late, Tim Albright of Salomon Smith Barney said its transaction activity has ramped up nicely, with an average of 771,000 units ordered per day in December -- up from 531,000 per day in November.

In an early December survey by Salomon Smith Barney, researchers found that Amazon is able to offer lower prices as a result of better purchasing and leveraging of its infrastructure. On average, bn.com's (Barnes and Noble's online site) prices were 11 percent higher for books, and Amazon's deep CD selection is on average 30 percent below list and 12 percent below Virgin's Megastore. The results showed that Amazon is highly competitive with land-based and online retailers, said Albright.

To meet Salomon Smith Barney's estimates, Amazon must average 763,000 orders per day through Dec. 22, and 250,000 per day thereafter for the month. "It appears that these results are well within Amazon's grasp," he said. He set a 12-month price target of $50.

52-week high: $55.87
52-week low: $25.81

Buy. Bob Toomey of Dain Rauscher is cautiously optimistic for the near term on Nike. "We currently estimate 44 cents in EPS in the quarter compared to 38 cents in the year-ago period," he said. "We are not overly enthusiastic about the near-term financial outlook due to the continued flat U.S. athletic footwear market."

He predicted a revenue increase of 6 percent -- from $2 billion to $2.1 billion -- between Q2 fiscal 2000 and Q201. Continued gross margin improvement and strong back-to-school sales in athletic footwear account for the increase.

But Nike also faces challenges. "We believe there is risk to this [$2.1 billion] estimate due to the hangover effect of retail consolidation, a continuing promotional price environment and Nike's stated goal of increasing its presence in the mid-price athletic footwear category, which could pressure gross margin," he said. He set a 12-month price target of $48.

Previous columns:

• Planar's panels display profit potential, 12-01-2000
• Nordstrom may face "subdued" holiday, 11-17-2000
• Expeditors beats the Street, but trades high, 11-13-2000
• Avocent expands with global computing, 11-03-2000
• Amazon remains a credible biz model, 10-27-2000
• Lattice Semi sustains top-line growth, 10-20-2000
• Costco stays afloat amid retail wreckage, 10-13-2000
• WaMu increases share in mortgage biz, 10-06-2000